Markets & Economy

Global Markets Weekly Update

U.S.

Stocks overcome weak retail sales numbers to post gains

The major U.S. equity indexes posted gains for the eighth consecutive week, as optimism that the U.S. and China would forge a trade deal before the U.S. raises tariffs offset weak December retail sales data. Stocks in the energy and industrials sectors within the S&P 500 Index generated the strongest returns, while utilities and financials were the laggards. T. Rowe Price traders noted that the S&P 500 Index held above its 200-day moving average, an important technical support level for some market participants.

Crude oil prices increased nearly 5% for the week, supporting energy-related stocks. West Texas Intermediate crude, the U.S. benchmark, climbed above the $55-per-barrel mark on Friday. OPEC and Russia have voluntarily cut their oil production, reducing supply and supporting prices. U.S. sanctions on Venezuelan crude exports, designed to pressure the government of Nicolas Maduro, are further pressuring global oil supply.

Trade agreement optimism supports stocks

Optimism that either the U.S. and China would reach a trade agreement before the March 1 deadline or that the U.S. would extend the deadline buoyed markets for most of the week (see below). On Tuesday, President Donald Trump said that he is open to extending the deadline if the two nations are nearing a deal by the beginning of March. However, National Economic Council Director Larry Kudlow said that no decision has been made to extend the deadline. U.S. government officials were in China during the week to take part in negotiations toward an agreement that would head off an increase in U.S. tariffs on $200 billion of Chinese goods to 25% from the current 10%. According to a Reuters report, China offered to boost its purchases of U.S. semiconductors in exchange for lower U.S. tariffs.

December retail sales disappoint

Weak economic data released on Thursday briefly derailed the market’s gains. The Commerce Department reported that retail sales declined 1.2% in December, marking the largest monthly drop since September 2009. (The December retail sales release was delayed because of the partial government shutdown in January). Consensus expectations were for unchanged retail sales. T. Rowe Price traders noted that the Labor Department’s weekly jobless claims figures also unexpectedly increased, further dampening sentiment about the U.S. economy.

Data show subdued inflation

The 10-year U.S. Treasury yield increased modestly over the week despite a sharp decrease on Thursday following the release of the unexpected drop in December retail sales. (Bond prices and yields move in opposite directions.) Inflation data continued to show limited upward pressure on prices, with the January consumer price index increasing 1.6% from the year-earlier period. The January producer price index declined 0.1% from December.

Heavy new corporate bond issuance

Corporate bond issuers brought large new deals to market, likely trying to take advantage of the decrease in market interest rates since late 2018. On Tuesday, tobacco company Altria Group sold $11.5 billion of new bonds to help fund its acquisition of a stake in e-cigarette firm Juul Labs. On Wednesday, Boeing and AT&T issued a total of $6.5 billion of bonds. T. Rowe Price corporate bond traders said that the heavy new supply likely contributed to Thursday’s weakness following the December retail sales report.

U.S. Stocks

Index

Friday’s Close

Week’s Change

% Change YTD

DJIA

25,883.25

776.92

10.96%

S&P 500

2,775.60

67.72

10.72%

Nasdaq Composite

7,472.41

174.21

12.62%

S&P MidCap 400

1,914.01

61.42

15.09%

Russell 2000

1,569.25

62.80

16.36%

This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

Source of data: Reuters, obtained through Yahoo! Finance and Bloomberg. Closing data as of 4 p.m. ET. The Dow Jones Industrial Average, the Standard & Poor’s 500 Stock Index of blue chip stocks, the Standard & Poor’s MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments of the U.S. equity markets by market capitalization. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock exchange and the National Market System. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell indexes. Russell® is a trademark of Russell Investment Group.

Europe

Europe’s stock markets rally amid signs of U.S.-China trade progress

The pan-European STOXX Europe 600 Index rose about 3%, buoyed by fresh signs of progress in U.S.-China trade negotiations. France’s CAC 40, Germany’s DAX, and the UK’s FTSE also advanced. Gains came despite more signs of slowing in the eurozone economy and the ongoing impasse over Brexit.

Euro declines against the U.S. dollar as Germany narrowly avoids falling into recession

The euro was slightly lower against the U.S. dollar as fresh data this week showed slowing throughout the eurozone, with the region’s largest economy, Germany, barely avoiding a slip into recession. German growth ground to a halt in the fourth quarter of 2018, holding steady after shrinking 0.2% in the previous quarter. (A common definition of a recession is two consecutive quarters of negative growth.) German industrial production also continued to decline, falling 0.4% in December, led by a drop in construction industry production. The country’s factory orders also dropped 1.6% in December from November, far worse than consensus expectations. Separately, Eurostat reported that the eurozone economy grew 0.2% in the fourth quarter from the third. Other data showed eurozone industrial production fell more than expected in December, down 0.9% month on month and 4.2% for the year-on-year period. The European Commission expects growth to decelerate to 1.3% this year from 1.9% in 2018.

British pound lower after Parliament rejects May’s Brexit strategy

The British pound was down against the U.S. dollar for the week after the UK Parliament rejected Prime Minister Theresa May’s strategy to withdrawal from the European Union (EU). It voted down a motion that reiterated the government’s plan to seek changes to the so-called Irish backstop, which is the contentious plan to avoid a hard border in Ireland.

Two days after the Spanish parliament rejected his ruling socialist government’s 2019 budget proposal, Spanish Prime Minister Pedro Sanchez called for an early election for April 28. T. Rowe Price Sovereign Credit Analyst Ivan Morozov said the move did not come as a surprise, and he expects the elections to be inconclusive and create an even more fragmented parliament. On a positive side, Spain doesn't have large anti-EU or populist parties, so from an economic policy perspective, the election campaign should be reasonable and shouldn’t negatively affect the country’s financial markets. That said, he noted that he expects a lengthy government formation process that could end in new elections again, similar to the events of 2015–2016.

Japan

The Nikkei 225 Stock Average rallied 567 points (2.8%) for the week and closed on Friday at 20,900.63, ahead 4.4% in 2019. The large-cap TOPIX Index and the TOPIX Small Index also generated strong gains of more than 2% for the week. Both broader indexes are ahead about 5.5% for the year to date. At the close on Friday, the yen stood at ¥110.49 per U.S. dollar, down slightly for the week and versus the ¥109.69 level at the end of 2018.

Japanese GDP registers 1.4% growth in the fourth quarter of 2018

Japan’s economy generated 1.4% annualized gross domestic product (GDP) growth in the fourth quarter of 2018 (third fiscal quarter). The economy recovered from several natural disasters in the prior quarter. Consumer and business spending posted gains despite pressure on exports from the slowing Chinese economy and the U.S.-China trade dispute. The preliminary reading from Japan’s Cabinet Office showed annualized GDP growth was in line with the median forecast from economists polled by Reuters—and reversed some of the 2.6% contraction in the second fiscal quarter. The Cabinet Office also reported real export growth of 0.9% from the quarter ended September 30. However, despite the recent strength, most forecasters believe that exports will decline in 2019 due to the uncertainty associated with the U.S.-China trade war. The largest impact on export growth is likely to be felt in the information technology equipment, electronics, auto parts, and heavy machinery segments. Although the Japanese economy is expected to expand in the March quarter, a global growth slowdown and the planned sales tax increase in October could dent consumer and investor sentiment.

Japanese corporate profits fall amid global growth slowdown

Japan’s corporate earnings weakened in the quarter ended December 2018. Most corporate executives cite the slowdown in China’s economy and the U.S. trade dispute as the primary culprits for the downturn in profits. Following years of robust growth under Prime Minister Shinzo Abe’s pro-business economic policies, Japanese companies were hurt by slowing global growth, which significantly impacted most of the technology giants, including Apple and Intel. The major concern for investors relates to the timing of a sustainable recovery. The International Monetary Fund forecasts that Japan, which saw economic momentum slow in 2018, will deteriorate further in 2019. However, Justin Thomson, T. Rowe Price chief investment officer, international equity, says that Japan’s corporate profitability is near an all-time high and that the risk of deflation has eased.

China

Chinese stocks post weekly gain as deadline for U.S. tariff hike looms in March

Chinese stocks rose as mainland investors returned from a weeklong Lunar New Year holiday in a buying mood. However, reports of ongoing disagreements between U.S. and Chinese trade negotiators raised doubts about the likelihood of both sides striking a deal by March, when the U.S. is set to ratchet up tariffs on Chinese imports. For the week, the Shanghai Composite Index added 2.5% and the CSI 300 Index of major stocks in Shanghai and Shenzhen climbed 2.8%, marking the biggest weekly gain in three months for both indexes, according to Reuters.

Market optimism rose midweek after U.S. President Donald Trump indicated his willingness to extend the 90-day trade war truce between the U.S. and China past the current March 1 deadline to give negotiators more time to broker an agreement, Bloomberg reported. Should both countries fail to reach a deal by that date, the Trump administration has said it will hike tariffs on $200 billion in Chinese-made goods to 25% from their current 10% level. Uncertainty about the prospects for a deal resurfaced Friday, however, after U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin wrapped up two days of high-level talks with their Chinese counterparts in Beijing. While both sides issued statements signaling progress in negotiations, other reports suggested that both countries remained far apart on an array of issues.

The drawn out U.S.-China talks signal that the White House intends to keep negotiating as opposed to backing out, believes T. Rowe Price Policy Analyst Katie Deal. As long as talks continue, it’s likely that the current 10% tariffs will stay in place and that the U.S. will refrain from hiking tariffs to 25%, she adds. Even so, the risk of tariff escalation and continued flare-ups in U.S.-China trade relations will likely test financial markets throughout 2019, Deal notes.

Other Key Markets

Indian stocks posted their biggest weekly decline in almost four months after a deadly attack on Indian soldiers in the disputed Kashmir territory added to the country’s uncertain political outlook. Both the S&P BSE Sensex and the NSE Nifty 50 Index ended the week down 2.0%, their steepest drop since the end of October, according to Bloomberg. The stock market declines came a day after an attack on a convoy of Indian soldiers in Kashmir that killed 40 and wounded five. Jaish-e-Mohammed, a Pakistan-based terror group, claimed responsibility for the attack, which marked the deadliest attack on Indian security forces since Prime Minister Narendra Modi took power in 2014. On Friday, Modi said that the perpetrators behind the attack “will now have to pay a very heavy price,” raising the prospect of military action against Pakistan and adding to investors’ concerns about India ahead of the country’s general elections, which are due to be held by May.

In other emerging markets, Brazil’s benchmark Bovespa stock market index rallied for the week after the government of newly elected President Jair Bolsonaro released the first details of a long-awaited pension overhaul plan. The pension reform bill, seen as key to ensuring Brazil’s long-term financial stability, will go to Brazil’s Congress on February 20. The bill proposes a minimum retirement age of 65 years for men and 62 years for women—a significant change for the country, where there is currently no minimum retirement age. In Russia, the ruble-denominated benchmark MOEX index fell for the week after a bipartisan group of U.S. senators introduced a bill to ratchet up sanctions against Russia for its policy toward Ukraine and allegations that Russia meddled in U.S. elections.

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